Last week we looked at Evicted HELOC Abusers who Break In and Squat in Foreclosed Homes. The fear embodied in those deranged fools is that anyone who buys a foreclosure may come face-to-face with the evicted family who claims they still own the property. Is this a rational fear? The author of today's featured article thinks buyers should be afraid. I think he is a fool.

When home buyers and people refinancing their mortgages first see the itemized estimate for all the closing costs and fees, the largest number is often for title insurance.

This moment is often profoundly irritating, mysterious and rushed — just like so much of the home-buying process. Lenders require buyers to have title insurance, but buyers are often not sure who picked the insurance company. And the buyers are so exhausted by the gauntlet they’ve already run that they’re not interested in spending any time learning more about the policies and shopping around for a better one.

Besides, does anyone actually know people who have had to collect on title insurance? It ultimately feels like a tax — an extortionate one at that — and not a protective measure.

The nature of all insurance is that you overpay for it until the day you need it, then you don't have enough.

But all of a sudden, the importance of title insurance is becoming crystal-clear. In recent weeks, big lenders like GMAC Mortgage, JPMorgan Chase and Bank of America have halted many or all of their foreclosure proceedings in the wake of allegations of sloppiness, shortcuts or worse. And a potential nightmare situation has emerged that has spooked not only homeowners but lawyers, title insurance companies and their investors.

The only people who are spooked are those that do not understand foreclosure and clean title. The whole point of a foreclosure is to clean the encumbrances from title. Very few claims against real estate survive the foreclosure process. A trustee's deed is the cleanest title possible.

When this story broke out, I talked with several title insurance reps about getting title insurance for the properties I purchase at trustee sale. Dumbfounded by my request, one of them asked, "What do you want to be insured against?" As far as the title industry is concerned, title insurance on a trustee's deed is unnecessary as their is no protection they could give you that you don't already have.

What would happen if scores of people who had lost their homes to foreclosure somehow persuaded a judge to overturn the proceedings? Could they somehow win back the rights to their homes, free and clear of any mortgage?

If that were permitted to occur, we would see the complete collapse of mortgage lending in this country. Title insurers would stop offering insurance on purchases of trustee deeds. Basically, every bank and third-party investor that bought at foreclosure would be unable to sell to a buyer that needs financing. The REO held by banks would plummet in value, and third parties would stop buying all auction properties. The resulting losses would cause our banks to collapse, and TARP II would be required to save the banking industry.

But they may not be able to simply move back into their home at that point. Banks, after all, have turned around and sold some of those foreclosed homes to nice young families reaching out for a bit of the American dream. Would they simply be put out on the street? And then what?

The answer to that last question may depend on whether those new homeowners have title insurance, because people who buy a home without a mortgage can choose to go without a policy.

This whole idea is crazy. If title insurers thought this risk was real, can you imagine what would happen to the cost of title insurance?

Title insurance covers you in case people turn up months or years after you buy your home saying that they, in fact, are the rightful owners of the house or the land, or at least had a stake in the transaction. (The insurance may cover you in other instances as well, relating to easements and other matters, but we’ll leave those aside for now.)

The insurance companies or their agents begin any transaction by running a title search, sifting through government filings related to the property. They do this before you buy a home or refinance your mortgage to help sort out any problems ahead of time and to reduce the risk of your filing a claim later.

But sometimes they miss things, and new issues can arise later.

That is the whole point of title insurance. Everyone after the auction purchaser needs to get title insurance for the reasons described above. Everyone other than auction purchasers needs title insurance because anyone on title after the auction and re-encumber the property.

For instance, the person doing the title search may not notice that a home equity loan is still outstanding or that a contracting firm filed a lien against the owner years ago. That could create problems for you later, when you try to sell the home.

Then there are the psychodramas that can ensue. The previous owner’s long-lost heirs or a previously unknown love child could show up, saying that they never agreed to the sale of the property. Or perhaps there was fraud against a seller who was elderly or had a mental disability, or forgery of an estranged spouse’s signature. It’s rare, but it happens, and when it does, your title insurance company is supposed to provide legal counsel or settle with whomever is making a claim.

Title insurance companies would like you believe that they are the good guys standing behind you. After all, you are the customer who owns the policy.

Title companies are the insurers backing your claim to title. They are the good guys.

… While the banks were pressing the pause button on many foreclosures, some title insurers were growing concerned as well.

On Oct. 1, Old Republic National Title Insurance Company released a notice forbidding any agents or employees to issue new policies on homes that had been recently foreclosed by GMAC Mortgage or Chase.

Clearly, the title insurer was also worried about a situation in which untold numbers of former homeowners have their foreclosures overturned. At that point, those individuals might claim the right to take back their old homes, but they’d also be responsible for, say, a $400,000 loan on a home that is worth half that.

If more mortgage insurers stop offering title insurance on foreclosed properties, the edge of the market abyss is very near.

So what would happen next? The banks that foreclosed might start the process over again. At that point, lawyers for the people who had been foreclosed upon might take the next logical step and try to show that the banks never had the documents to prove ownership of the mortgage in the first place. The banks might settle at that point, writing checks to everyone who had gone through a disputed foreclosure in exchange for each of them giving up the title.

But if banks did not settle, or the evicted homeowners refused to settle and fought on and won, they might end up owning their homes once again and not owing the bank either.

He must be joking. How does the delinquent borrower end up owning the home and not having any debt? Does this guy really think a judge is going to dismiss the debt as well as all claims against title that debt had? I imagine that idea is very appealing to loan owners who are facing foreclosure, but it isn't going to happen.

Or banks might agree to slice a big chunk off the remaining balance in exchange for a release from any liability for the errors it made.

At that point — and again, this is what Old Republic and investors in other title insurers fear — those homeowners might actually want to move back in. But some foreclosed homes were sold by the banks to others who now live there. And those new residents would have big, fat title insurance claims if their predecessors ever turned up at their doorsteps, proclaimed them trespassers and told them to leave.

If you bought a foreclosure, and someone showed up at your door and told you they owned your house and you needed to leave, what would you do? Unless they were accompanied by armed Sheriff's deputies, i know what I would do….

“All of these Joe Schmos who did everything legally would then be in the middle of it, too,” said Mr. Kovalick, who manages an auto repair shop and is now hoping not to be one of those Schmos.

“Now, you’d have two total disasters,” he said. “How would you like to be the judge to get that first case?”

It shouldn't be a difficult case to solve. The foreclosure removes any previous claims against title. Unless their was a procedural error in the foreclosure proceedings, the foreclosure cannot be reversed. Arguing the foreclosure should not have gone forward will not stand up. it's too late for that argument once the foreclosure has happened. Arguing wrongful foreclosure must occur before the auction.

While homeowners like Mr. Kovalick may have title insurance, it generally covers them only for the purchase price of the home. When you buy a home out of foreclosure, however, it often needs a lot of work. “If I bought it at $200,000 and it’s a steal but I had to gut it and sink $100,000 more in, my recovery is limited if there is a problem,” said Matthew Weidner, a lawyer in St. Petersburg, Fla.

Indeed, this possibility has occurred to Mr. Kovalick, who has plans to put an addition on his home and is asking how he could extract that investment if someone ever turned up on his doorstep and asked him to leave. “What do I do, take the paint off the walls and the custom blinds off the windows?”

Chances are, it will not come to that. After all, title insurers could settle with the previous residents, allowing them to walk away with a big check to restart their lives elsewhere.

More fantasies for the foreclosed. I wonder if this author is trying to solicit work for attorneys. If people who have gone through foreclosure thought there was a chance they could recover their houses or get an enormous cash claim against a title insurance company, the foreclosed previous owners will flock to attorneys to process these claims. A new cottage industry would be born.

Still, for anyone considering buying a bargain home out of foreclosure anytime soon, consider asking your title insurer if any special riders are available that can cover appreciation on your home in the event of a total loss.

That said, if you can possibly help it, stay away from foreclosed homes until the scene shakes out a little bit.

This guy is suggesting buyers stay away for ignorance of the foreclosure process and the nature of title insurance. There are many legitimate reasons not to buy property right now, but this isn't one of them. Prices are too high and beginning to fall again; that is a good reason not to buy. The worry that your title might not be valid is not a good reason.

Some people will undoubtedly make a fortune investing in these properties in the next few months. But if your down payment represents most of what you have in the world, it’s hard to justify betting it all on a situation like this one.

Betting it? What is the buyer's risk of loss? Even if the impossible happened, the buyer would be made whole by the title insurance company. This author has taken ignorance to the workings of title and created a number of fanciful scenarios that simply won't come to pass. I expect better from the New York Times.

She lost a fortune

Gains and losses are all relative. For most middle-class working Americans, losing $130,000 is a big deal. The owner of today's featured property can't be too happy about losing all that money and seeing her credit get trashed.

The property was purchased on 11/10/2005 for $629,000. The owner used a $503,000 first mortgage and a $126,000 down payment. She did manage to open a HELOC on 2/22/2006, but there is no way to know if she extracted half of her equity. For her sake, let's hope she did.

Since our real estate market is a giant Ponzi Scheme, for every winner there is a loser. Mostly it is the banks and ABS investors who are losers, but sometimes it is the homeowner-specuvestor who gets crushed.

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Beautiful, upgraded Irvine home in exclusive Woodbury community. This home features a kitchen with gourmet appliances, granite counters custom window covers and a sliding door to the private and enclosed patio. One of only a few units that has it's own patio with no shared wall to neighbors patio. Carpet is brand new, paint is perfect throughout with designer colors. Crown molding in two rooms, sleek dark wood cabinets throughout entire house, wrought iron stair case railing. Home is perfect and move-in ready! And enjoy all the community amenities too! WE NEED A NEW OFFER TODAY – ALMOST APPROVED!

We need a new offer — almost approved? In other words, this sat on the market forever as a short sale, and when the bank finally got around to approving the old offer price, the buyer had long since moved on. This administrative delay is caused by a combination of administrative incompetence and the desire to avoid taking losses. If prices go up, banks are rewarded for this behavior; however, when prices start going down, these delays cost them a great deal of money.

36 thoughts on “Should You Fear You Won't Get Clean Title to Real Estate?”

Really? With Paul Krugman as their “go to” guy on economics, a Keynesian true believer… the NYT has been shilling for Goldman Sachs and all of the money center banks since the creation of the Federal Reserve…what makes one think that they have anything rational to say about banking today?

As I see it the Irvine CA market is still inflated and with WTF prices and sellers reluctant to reduce prices I don’t see much change here for the foreseeable future…with me finding out last week that my current landlord is also going through loan modification and possible foreclosure the time has come where I must conclude that I am better off buying a property out of state and am making plans to settle down outside of California, its with great regret that I come to this conclusion, I am not going to go down the path of renting again since I will have no clue as to who is in trouble or not in this area…thank you Irvine renter for saving me from buying something here in Irvine and being stuck here I am so glad that I am not tied down to a house that is declining in value…good luck with everything and hope that one day I may be able to return to California once all the kool aid has gone!! Adios amigos!!

I came to that same conclusion four years ago and I still own my property in CA. I come back to visit and vacation. CA economics still makes no sense to me. I see CA winding down in slow spurts over the next 10 years. I think of CA as a game of musical chairs where the chairs are people with money and every so often the music stops again, another one leaves. There is still so much bubble money sloshing thru CA that it will take 10 years before new equilbirum occurs.

I said the same thing five years ago, and now I can’t wait to get back. Just make sure when you leave, you choose a nice area.

I’m paying 40% more than what I paid for a rental in CA for a poorly constructed apartment (albeit in a nice area) that has significant additional utility costs (hot and humid summers, cold clammy winters) and I have to deal with bad drivers, horrible accents, bad attitudes, and generally unpleasant people.

I look forward to returning, despite all the doom and gloom scenarios. I have no problem renting for a while as it’ll give me more time to save.

I wouldn’t call reloacting to a more expensive market fleeing CA. There are plenty of good markets, Albuquerque, Austin, Midwest cities where you can live for a lot less and save a lot more so you have the money to come back to CA and play. Markets where you don’t get a “$360” fine for running a red light because your state is broke. States whose governments are not run by Unions. I’m not bashing CA when I say that CA is crazy. I stating a fact. CA is beautiful, the weather can’t be beat, but voting with your feet and moving is not the end of the world. By the way, I would (and did) relocate to another state before I’d move to Corona.

There are but a handful of areas in the US that have the quantity of jobs and high paying jobs that the Los Angeles / Irvine area offers. In the areas of the US that have more high paying jobs, housing and rent is more expensive than Irvine.

Don’t be fooled by median income statistics. New York City has a lower median income than Irvine and SF has about the same median income as Irvine. Both have more high paying jobs but housing is also more expensive. Bottom line is LA/ Irvine has more high paying jobs than almost every area of the US outside of a few cities which are more expensive.

Hilariously, with all that info and controversy, the “I expect better from the New York Times” was the statement that most caught my attention also. Personally, I do not expect anything but, lies, spin, mischaracterizations, and just plain bad information from The New York Times.

Maybe MERS is doomed afterall ? This could get really ugly quick. Who in their right mind would put a huge bet on a forclosed property with this current news. Can you imagine the fallout if these 2 professors could be correct ?

Yes sir. Those same monkeys flew out of my ass back in 2006 after we all predicted this huge failure in the Mortgage/RE business a year before it happened. Now 5 years later. The cards continue to fall. Yes even a broken watch is right twice a day. I have learned of one thing in this life. Never say Never.

The damage has been done. Its called FUD.
Fear, uncertainty, and doubt.

What a great time to be in Real Estate Sales.
What else can go wrong ? Maybe that SuperNova ?

Grad you made right decision and you are free now.
IMHO, if you are not rich already or cannot make very good money from your job (like $180K a year), when you sign the mortgages paper, you are unofficially a slave of the TIC – you have work hard for next 15 years before you are free again.
But you still can choose other areas, such as Ladera Ranch or Corona, where the home prices maybe bottomed, especially if you buy a REO or short sell.

Ladera Ranch or Corona? Why would I want to add an extra 30-45 min’s to my daily commute? Not to mention the extra gas costs. Plus giving away so much money to the toll roads. Plus the frustration and stress of the extra traffic. Plus the much higher summer temps. Plus the drab landscape in Corona (and not much better in Ladera Ranch). Why not just keep renting in a nice place and wait for RE prices to return to historical norms?

My job is field-based. I travel all over SoCal for work. I know quite a lot about all of the areas, including Corona. You are welcome to spin whatever fairy tales you like. You won’t have to worry about me wanting to move to Corona.

Here is the thing, if MERS, and these foreclosures, and whatever other garbage you can throw out there is “fraud,” then this doesn’t stop at just foreclosed properties. It affects over 64 million individual properties that are part of this whole “system of fraud.”

Like IR said, this is simple. Once the foreclosure is complete and the trustee’s deed has been delievered, you have a clean piece of property. Period. Unless you have a procedural defect in the foreclosure, it is virtually impossible to have the foreclosure undone. Period.

Come to think of it, maybe foreclosure properties are the only “safe” pieces of property to buy……..

Re: MERS and the lack of public recordation. The borrower still owes the money whether the lender has the right to foreclose or not. The interest, fees and penalties will keep accruing on the note which the lender owns, unless the lender can not show they own the note, which may or may not be an issue connected to MERS. I think many of you are getting confused with ownership of real property, being a party to a mortgage contract, and public recording.

Well, but the whole legality of MERS acting as a strawman for the real lenders has already been legally challenged in some states. And judging from the way this organisation is handing out the paperwork, without applying due dilligence if they’re the real mortgage holder or not is rather questionable. Of course, with their few employees (media, says, about 60) they’re actually unable to check the validity of the requests. This negligent way of handling the records may be successfully challenged in the courts, and delay many foreclosures.

This doesn’t say that the borrower doesn’t owe the money. But the question is, TO WHOM? And in those cases where banks fraudulently foreclosured a home, despite not having the legal title, not only the affected homeowner, but the real lender, too, can successfully challenge this. So, this whole way of banks shortcutting the legal requirements can seriously backfire, from two different directions. High time to stop this kabuki theatre and to get back to proper proceedings, with the real lenders being on record (instead of the trojan horse MERS) and with the courts insisting on seeing the notes instead of phony testimonies by bank managers!

Ha IR, I agreed with everything you said except for this. I could tell from it’s soft-headed liberal, “oh boo-hoo for the poor squatters” tone that this was a NY Times article before I ever checked the URL. And I just love that ridiculous line of “reasoning” that somehow the squatters could win the house. I’ve heard that before from some dumb commentator and I was in disbelief.

The NYT is horrible, a dying relic, a dinosaur bellowing as it sinks into the tar pits. Good riddance!

“Orange County had the smallest year-over-year sales decline in the region, with transactions down 10.7%. Regionwide, they’re down 16% from September of 2009, and by as much as 23.7% in Riverside County.”from Lansners blog

Sales in Riverside County down 23.7%? Whoa! Prices soon to follow. Riverside is gonna get a price shellacking.

And what happens if the Title Companies have so many claims from “illegal” foreclosures that the Title Company itself goes bankrupt? It wouldn’t take long with enough claims. That’s my real worry, as my TI policy covers fraud, etc. Next, the Title Companies would have to be bailed out. The insurance is only as good as the company backing it.

Perfect combination of clip art and caption with the lady screaming, “I lost your house in foreclosure, and I want it back! It’s mine. Give it back to me!”, IR. 🙂

On the other hand, since I was just harrassing Roger Banowetz to use spell check and grammar check next time, I should be equal opportunity and say the same to you. Running a grammar check in something like Word before posting would catch painful-to-read errors like “their is no protection” that spellcheckers can’t find.

How ’bout this one, guys – “Winning bid on mortgage buys family heartache”

Roberta and Randall Strand took $97,606 out of their paid-off house to buy a foreclosed home at a courthouse auction. Five months later, they found out they actually bought the second mortgage, and that the bank planned to foreclose on the first mortgage, leaving them out in the cold.

Here’s something ELSE to be fearful of when buying foreclosures. Don’t buy the foreclosure at an auction, but look for those that are listed on the MLS. You have more time to do due diligence and you don’t get caught up in the passion of the moment. An auction is no place to make a serious decision unless you are very, very experienced at buying foreclosures.

Never buy a place, foreclosed or not, without involving a title company and lawyer and building inspector. The closing should take place at the title insurer’s offices and your lawyer should have examined everything, and you should have had a thorough inspection of the property before making an offer.

Used to be that buying a house was a much simpler process. Before 1980 or thereabouts, you didn’t need a lawyer- the lender and the title company saw to it that little things like unpaid 2nds and other liens against the property were taken care of, or the sale didn’t happen. Lenders carried their own paper back in those days, so they vetted everything very carefully.

Most middle-class buyers still unthinkingly expect that they will somehow be protected against stuff like this when they buy. You won’t be. Nobody will protect you against anything, least of all your lender.

SRY, IR, but imho in this article you omitt mentioning a few important points. Firstly, there are cases where the servicing banks foreclosured homes they didn’t have any title to at all! In some instances, the houseowner didn’t even have a mortgage anywhere. In such a case, of course anyone who bought this at an auction is in jeopardy. You can’t keep stolen property, EVEN if you xourself did nothing wrong!

Secondly, as you certainly know, nowadays the “governmental records” only say that MERS is owning the mortgage. This doesn’t say anything about the REAL lender at all, making it very difficult for the title insurers to determine the legality of a foreclosure.

Thirdly, actually there have been reports about thugs being hired by the banks to break into houses BEFORE the foreclosure proceedings had come to their elgal conclusion! In some cases it were even the wrong houses. And the local police department did NOTHING to stop this or to hold the burglars accountable. The Sherrifs seem to hold the opinion that this is an excusable misdemeanor which doesn’t have to be prosecuted as long as a bank is behind this. So, if you’re a houseowner, good luck with trying to stop this illegal behaviour by legal means!

Amd then, there have been a few cases where the court essentially voided the mortgage because of intolerable fraud by the banks! In such instances, the homeowners actually won their house. Of curse, this is the exception for the rule, but it has been reported in the media, and so we should expect more homeowners to fight the foreclosure, hoping the chaotic record keeping of the servicers, together with the banks lawyers shamelessly lying to the court, will result in such a favorable outcome for them, too. And that the banks illegally tried to save some bucks by employing “robo signers” gives every homeowner fighting his foreclosure a good argument at court. Maybe most of them won’t be awarded by the court with a mortgage free house, but at least it will delay the mortgage process considerably.

This doesn’t say that the ethics of the sqatters, who don’t pay back their debts and live in the house rent free, should be recommended. But the ethics of the banks, who didn’t pay due dilligence to record keeping and verifying the claims is unethical, too. And most of the time the banks have the stronger lever, and enforce their “rights”, wether they are legal or not. And this may result in some foreclosures later being successfully contested in court. So, sry, but imho your article here is rather onesided, and leaves important facts out of the picture.